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Here's what kind of return you can expect from stock markets going forward – Financial Post



Toronto Stock Exchange

Recent stock market volatility has put a spotlight on daily market movements for people who would not normally pay such close attention to their portfolio. Setting appropriate expectations about investment returns is important for investors and advisors. These expectations depend on several factors and impact investment and financial planning decisions.

Interest, dividends and capital gains

Most people in the investment industry use treasury bills or government bonds as a proxy for a risk-free rate of return. However, most average investors would consider a Guaranteed Investment Certificate (GIC) to be a more appropriate benchmark.

GIC rates are currently in the 2.5 per cent range for one-to-five-year terms. This is unusual, as longer-term GICs usually pay higher interest rates than shorter-term ones. The yield curve is currently “flat.” In order to secure rates of 2.5 per cent, you need to look past the banks to trust companies and credit unions, as the banks are only paying between 1.5 and two per cent.

The FTSE Canada Universe Bond Index is a good benchmark for mid-term Canadian investment grade bonds, including government and high-quality corporate bonds. The current yield to maturity (interest rate) is only 1.5 per cent.

The distribution yield (dividend rate) for the S&P/TSX Capped Composite Index is currently 3.6 per cent, and for the S&P 500, it is 2.4 per cent. These yields assume the underlying companies continue to pay the same dividends in the next year as they did in the past year, which may be questionable given the current state of the economy.

Higher yielding bonds are available for investors willing to take on more risk. Higher yielding stocks with larger dividends are available as well, albeit potentially at the expense of potential capital growth otherwise reserved for companies that may pay lower or no dividends.

Stock market investors expect to earn a return by way of capital appreciation or an increase in the underlying price of stocks. Stock markets generally rise over time, although that rise is not in a straight line, as we have seen underscored in 2020.

Historical returns

Stocks rise in value about three out of every four years. They typically do not fall in value in consecutive years as recessions tend to be short lived. Over the past 100 years, the S&P 500 has only had four multi-year declines, including four straight years at the outset of the Great Depression, three straight years at the start of the First World War, two years in a row during the 1973 oil crisis, and three consecutive years following the bursting of the tech bubble in 2000.

A balanced portfolio of stocks and bonds has not had a negative five-year return since 1935. As a result, a balanced investor with a time horizon of more than five years can probably expect to have a higher portfolio value than now by that time.

Over the past 50 years, the TSX has returned 9.1 per cent annually. The S&P 500 has returned 11.0 per cent in Canadian dollar terms. Canadian inflation over the past 50 years has been 3.9 per cent, so this means part of those returns are reflective of higher annual cost of living increases in the past than we are used to today. The Bank of Canada and most central banks have a two per cent inflation target.

A Toronto Stock Exchange (TSX) ticker is seen in the financial district of Toronto.

Cole Burston/Bloomberg files

Over the past 20 years, going back to the peaks of the 2000 dot-com bubble, Canadian stocks have only returned 6.3 per cent, and U.S. stocks, in Canadian dollars, only 5.4 per cent.

Historical bond returns are somewhat skewed because interest rates were so much higher in the past. Canadian three-month treasury bills — the aforementioned proxy for a Canadian risk-free rate — returned 5.6 per cent over the past 50 years, but just 2.0 per cent over the past 20 years. Given the three-month treasury bill yield is currently 0.27 per cent, this reinforces why some aspects of investment history can result in deceiving expectations for the future.

Expected returns

FP Canada is the professional body for Certified Financial Planners (CFPs) in Canada. Their 2020 Projection Assumption Guidelines found the average long-term return assumptions from 11 actuarial and asset management firms for bonds was 3.15 per cent. Canadian stocks, foreign developed market stocks (like the U.S.), and emerging market stocks (most notably China) were forecast at 6.05 per cent, 6.25 per cent, and 8.02 per cent respectively.

The most recent triennial Actuarial Report on the Canada Pension Plan from Dec. 31, 2018 included government estimates for stock market returns. They anticipated a “real” rate of return for public equities of 3.9 per cent until 2025 due to low cash returns. By 2025, their forecast was 4.3 per cent. In a two per cent inflation environment, these real returns suggest a nominal 5.9 to 6.3 per cent per year overall for stocks, with higher return potential identified for emerging markets and private equities.

There are other methods to try to forecast future stock market returns, perhaps most notably from Yale economist and Nobel Prize winner, Robert Shiller. The Shiller P/E, or cyclically adjusted price-earnings (CAPE) ratio, is a statistical method used to imply future stock market returns. It is determined by dividing the price of a stock or a stock market, like the S&P 500, by the average of the previous 10 years of inflation-adjusted corporate earnings.

A lower CAPE suggests that stock prices are cheap relative to historical earnings. A high CAPE — as we have right now in the U.S. — implies stocks are overvalued and future return expectations are low.

The Shiller P/E ratio has its criticisms, some of which suggest today’s CAPE cannot be compared to historical ratios due to low interest rates, different business and regulatory conditions, and changes in accounting methods.

Investment and financial planning

So, what does all this mean for investors and advisors? One takeaway should be that future stock market returns could be lower than they have been in the past. This prognostication has nothing to do with the pandemic or trying to make a call on what stocks will do for the balance of 2020. It has more to do with the fact that today’s low interest rates and inflation suggest future returns must be lower.

Long-term stock market returns of six to seven per cent are probably reasonable for most public stock market investors, and potentially seven to eight per cent for private equities and public emerging markets.

Most investors will not earn six to eight per cent simply because of fees and fixed-income exposure. Investors cannot invest for free, cannot consistently beat the market net of fees, and few investors are exclusively invested in stocks.

Advisors should be continuously monitoring an investor’s risk tolerance, using the pandemic volatility as a barometer for how much risk an investor is truly willing to take.

For purposes of retirement planning, long-term returns of three to six per cent as a range may be appropriate assuming a two per cent inflation rate, depending on asset allocation and fees, and contingent on whether a retirement plan includes a Monte Carlo simulation or stress testing.

Appropriate expectations about investment returns from year to year and over an investor’s lifetime can help improve short and long-term investment outcomes. Developing a financial plan based on those expectations can help set monthly saving and spending targets, evaluate insurance needs, determine tax and estate strategies, and keep an investor invested when the going gets tough.

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.

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If Elon Musk scraps Twitter deal, here's what may happen to the stock – Yahoo Canada Finance



Twitter investors should brace for an all-out crash in the stock price if Tesla CEO Elon Musk abandons his bid for the social media platform, warns one veteran tech analyst.

In the absence of a bid, we would not be surprised to see the stock find a floor at $22.50,” said Jefferies analyst Brent Thill said Tuesday in a new note to clients. Such a price would be about 40% lower than Twitter’s current trading level.

Musk’s outstanding deal for Twitter is for $54.20 a share.

The path is being cut for that price put forth by Thill for Twitter shares, by Musk’s own doing.

In an early morning Tweet, Musk said “Yesterday, Twitter’s CEO publicly refused to show proof of <5%,” adding that “this deal cannot move forward until he does.”

The new tweet from Musk arrives after a tense exchange on the social media platform on Monday.

Twitter CEO Parag Agrawal wrote a long tweet thread to try to counter Musk’s claims the platform was chock full of fake accounts.

“We suspend over half a million spam accounts every day, usually before any of you even see them on Twitter,” Agrawal said in the 13-tweet thread. “We also lock millions of accounts each week that we suspect may be spam — if they can’t pass human verification challenges (captchas, phone verification, etc).”

Musk responded with a poop emoji.

Musk, the world’s richest person on paper, then followed up 14 minutes later with: “So how do advertisers know what they’re getting for their money? This is fundamental to the financial health of Twitter.”

Thill says Musk is simply trying to negotiate a lower price for Twitter. A fair value for Twitter in light of the rout in tech stocks in recent months would be $42 a share, Thill estimates.

Other analysts on Wall Street think a deal doesn’t get done.

“The chances of a deal ultimately getting done is not looking good now and it’s likely a 60%+ chance from our view Musk ultimately walks from the deal and pays the breakup fee,” Wedbush tech analyst Dan Ives said in a note to clients.

Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

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Why You Can’t Just Order Baby Formula From Canada – Lifehacker



Image for article titled Why You Can’t Just Order Baby Formula From Canada
Photo: The Toidi (Shutterstock)

With baby formula continuing to be in short supply, parents of infants are looking for creative ways to get their hands on that precious Enfamil—but a simple, seemingly ingenious solution that’s going viral right now will not work as described. The suggestion that’s spreading on Facebook and Twitter advises parents to go to Amazon and change their account’s country from the U.S. to Canada.

The claim is that if you do this, you will be rewarded with all kinds of baby formula-purchasing options—because Canada doesn’t have a major formula shortage. The problem, however, comes when you want to get the formula (or anything else) actually delivered from Amazon Canada. The company will only ship products within Canada, so unless you have a friend in Manitoba, it’s not going to work.

Amazon’s shipping restrictions page says:

Certain restrictions prevent us from shipping certain products to all geographical locations. Restrictions for specific items may require the purchaser to provide additional information in order to ship the item.

You might be able to find a third-party formula shipper on Amazon, but this is expensive in terms of shipping costs, and it might not be legal, depending on the kind of formula being imported.

The FDA’s role in all this

The larger issue of why the U.S. as a nation doesn’t import more baby formula is more complicated than Amazon’s rules. Only about 2% of the U.S.’s formula comes from foreign sources. February’s recall from major manufacturer Abbott threw off our delicate national formula supply chain, and correcting the problem presents some serious challenges.

If it was some other commodity, maybe more could have been imported quickly, but we’re particular about our baby formula. Formula has to meet the FDA’s nutritional standards and other requirements to be sold here. While European brands of formula generally meet or exceed the FDA’s nutritional requirements, (so much so that there’s a black market for foreign formula) the packaging and other aspects of the products are a different story.

The recall and FDA approval is only part of the story—the rest is economics.

Tariffs and dairy protection

In order to protect the U.S. dairy farming industry and U.S. formula manufacturers, the tariff on importing baby formula is set at 17.5% for most kinds of infant formula. The recently revamped NAFTA agreement actually raised the cost of importing Canadian formula, discouraging anyone from building a new plant there, and making it costly to import any excess from Canadian factories.

Light at the end of the tunnel?

While there’s no way to change tariffs quickly, the government is taking other steps to try to end the crisis. The FDA this week announced plans to ease the shortage through loosening up some of its rules (but not the ones covering nutritional requirements), and Abbot today announced its facility should be back online, with new safety standards in place, in a couple weeks.

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NS gas prices jump by 9.5 cents – CTV News Atlantic



Tuesday was another record-breaking day for gas prices in Nova Scotia after they jumped by 9.5 cents overnight — just four days after they had reached $2 per litre in some parts of the province.

The minimum price of regular self-serve is now $2.08 per litre in the Halifax area, or Zone 1. The new maximum price is $2.10.

The biggest jump was in Cape Breton, or Zone 6, where the minimum price of regular self-serve gas is now $2.10 per litre. The maximum price is $2.12.

There were long lineups at some Nova Scotia gas stations Monday night after the Utility and Review Board announced that it would invoke its interrupter clause at midnight.

The price of diesel did not change Monday. However, the UARB said Tuesday that it would invoke the interrupter clause, and the price of diesel oil would be adjusted at midnight.

The price of gasoline won’t be affected by the adjustment.

The UARB said the price adjustments are “necessary due to significant shifts in the market price” of gasoline and diesel.

Gas prices are showing no signs of letting up as the average price in Canada tops $2 a litre for the first time.

Natural Resources Canada says the average price across the country for regular gasoline hit $2.06 per litre on Monday for an all-time high.

The average was a nine-cent jump from the $1.97 per litre record set last week, and is up about 30 cents a litre since mid-April.

Gas prices have been climbing steadily since late February when oil spiked to around US$100 a barrel after Russia invaded Ukraine. The price jumped to over US$110 per barrel last week.

Record-high gas prices fuel frustration

When Sam Vatcher saw the price at the pumps in Halifax this morning, she was shocked.

“I don’t know how anyone is going to drive anywhere,” said Vatcher.

The latest prices have SUV driver Bill Foster wondering how he will be able to afford fuel going forward.

“I’ve got to get kids to sports and I’ve got to get kids to school,” said Foster. “Other stuff is going to have to get cut out just to pay for gas.”

In addition to the conflict in Ukraine, gas analyst Patrick Dehaan says the high gas prices are also largely linked to the pandemic.

“Canadians and Americans’ global consumption plummeted along with oil prices,” said Dehaan. “To the degree that oil companies started shutting down production. That was the problem.”

Dehaan said, during the pandemic, oil production went offline. Then, as the economy reopened, Canadians started leaving their homes and travelling more.

“Global demand started going back up,” he explained. “But because of the shutdowns, we very quickly developed an imbalance between supply-and-demand that has grown over time.”

As a result, some feel Canadian consumers will move away from oil and gas in favour of electric vehicles.

Electric vehicle advocate Kurt Sampson says he tells his children every day, “when you are older, and when you grow up it will be the opposite. Everybody will be driving electric vehicles.”

Sampson has an app on his phone that tracks fuel savings. By switching to an electric vehicle and not purchasing gas, he is on pace to have yearly savings in the range of $8,000.

“Electric vehicles are cheaper to own and operate,” said Sampson. “If you do the long-term calculation, not just a sticker price, they will save you money. They are also better for the environment.”

Sampson said drivers are increasingly switching to electric vehicles, and with fuel prices continuing to climb, he expects the trend to increase even more in the coming years.

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